Quality change and new products.

This paper reports on a component-by-component evaluation of the Consumer Price Index (CPI) and extrapolate research on bias from one category to another when the categories seem related. The difficulty created by quality change in existing products, and by the introduction of new products, is highlighted by returning to the definition of a cost-of-living index: a comparison in two time periods of the minimum expenditure required to achieve the same level of well-being. A cost-of-living index measures the effect of "pure" price movements relative to a particular reference period, trying to hold the average "utility" level and all other attributes of that period constant, including the level of governmental transfers and taxes, and the probability of various diseases and other disasters. Any change in the technology of consumption, in the qualities and list of existing products, can be evaluated on the basis of existing price relationships in the reference period or their estimated shadow-prices. Moreover, with patience, imagination, and additional research, it should be possible to quantify the benefits accruing from improved quality and new products well beyond the more limited focus of the current CPI.